Analysis & Opinion

LONDON Dec 17 (Reuters) - U.S. Treasury prices edged lower
on Monday as U.S. politicians took a small but significant step
towards averting the wave of tax hikes and spending cuts that
investors fear could crush economic growth next year.

* Republican House Speaker John Boehner proposed an increase
in taxes that, while still far short of what President Barack
Obama is seeking, represented the first real movement in "fiscal
cliff" negotiations ahead of a Dec. 31 deadline.

* "It's important that there's been a shift, so to that
extent it's a positive development ... (but) people are now wary
over-interpreting what politicians say," said Marc Ostwald,
strategist at Monument Securities in London.

* The progress cooled demand for U.S. debt, which acts as a
safe haven and benefits from uncertainty over the negotiations,
sending Treasury futures 7/64 lower to 132-22/32. U.S.
10-year yields were 2 bps higher at 1.72 percent.

* Japanese election results also added to the pressure on
U.S. debt. A landslide victory for Shinzo Abe raised the
prospect of more aggressive monetary stimulus from the Bank of
Japan which weighed on low-risk government bonds, including
Treasuries and German Bunds.

* However, the drop in prices was not seen as the beginning
of a long-term trend, with fiscal cliff worries likely to keep
trading choppy within a narrow range.

* "We might cheapen up a few basis points during this week
but we can't cheapen up too much with the fiscal cliff in the
background," a trader said. "I'd be a buyer at 1.75 percent ...
It's a narrow range, if you can get them in at 1.75, you'd let
them go at 1.67-65."

* As trading activity reduces into the Christmas holiday
period, focus would remain on the fiscal cliff talks, with new
Treasury supply the only other diary item likely to influence
price action this week, market participants said.

* The U.S. Treasury sells two-year debt on Monday, with five
and seven-year note sales on Tuesday and Wednesday.